More snow in July

I reported recently about Duo Dickinson’s editorial, in which he argued that the architectural profession should have played a larger role in warning “against the rip-off” as the housing bubble inflated beyond reason. I agree that architects should have done more, but if we’re pointing fingers in retrospect at those who should-have-known and should-have-warned about the impending housing debacle, I’d start with the National Association of Home Builders (NAHB). They knew about the inflated values. They knew about the dangers of the risky mortgages. But while homebuilders were setting housing start records in those unnatural and perilous conditions, instead of sounding alarms, they were a chorus of celebration. They expressed their “concerns,” but in reality it was their dreams come true.

In January of 2005, David F. Seiders, NAHB’s chief economist, wrote a cheery article in Nation’s Building News (NBN), the online weekly newspaper of the Association.

“The housing sector turned in a great performance in 2004, thanks largely to the stunning behavior of long-term interest rates as well as to deepening discounts of initial rates on adjustable-rate mortgages by lenders. New records were set for home sales and single-family housing starts as well as for sales of condo units in multifamily housing, and the rental housing market performed reasonably well in the face of record-high vacancy rates.” (Italics mine.)

In fact, 2004 had been a record year, so the real concern was whether the growth potential for housing had topped out. Seiders wanted to assure his hungry builders there was room for even more growth. In his own words:

“The U.S. homeownership rate hit an estimated 69% in 2004, easily a new annual record… The dramatic performance of recent years moved the U.S. homeownership rate toward the top of the list of countries around the world, prompting speculation that the U.S. rate has approached some sort of natural limit.

But there’s still plenty of potential for rising homeownership in this country, public policy is focusing upon some glaring differences across income classes as well as racial/ethnic groups, and structural changes in the mortgage market have extended the reach of homeownership to more marginal buyers. Thus, it appears that builders of single-family homes and condo units can look forward to a dominant share of the housing pie for some time to come…” (Italics mine.)

In other words, if we’re going to build more homes, we need a larger homeownership rate and to increase homeownership we ought to find a way to open up the “American Dream” to those who currently can’t afford it. (The cynic in me rises up when self-serving intentions are attempting to masquerade as benevolence.) To give these poor people the opportunity to own a home, all we need are “structural changes” to mortgages.

Well, they got those “structural changes” alright and only a few months later, in the spring of 2005, at the NAHB Construction Forecast Conference, it was obvious they already understood that creative mortgages were a double-edged sword. The speakers recognized the potential looming problems of the sub-prime mortgages with clarity. One of the speakers was Thomas Lawler, an expert in risk policy from Fannie Mae. Here’s how his comments were summarized in NBN:

“One area of special concern on the financing scene, Lawler indicated, is a shift of sub-prime borrowers away from FHA mortgages to adjustable-rate loans. There were $600 billion in sub-prime originations last year, he said, and the vast majority of them — 66% — were in two-year ARMs.”

“Two-thirds of sub-prime mortgages — which go to borrowers with lower credit scores, less history managing money and less stable incomes — will be reset between now and 2006, he said. ‘If the Fed stopped raising interest rates today, the vast majority of these loans go up 200 basis points.’” (Italics mine.)

That’s a pretty cogent description of a tidal wave of defaults visible on the horizon. These guys were smart and prescient. The Building News article about this noteworthy conference continues:

“They did find… cause for concern over the sustainability of the boom that is occurring largely in parts of the East and West Coasts and worrisome indications that lower-end buyers have been disproportionately taking out adjustable-rate mortgages that expose them to interest rate risks they may not be able to handle.”

It therefore appears that in January, the brain-trust of the NAHB was pulling for sub-prime mortgages to be the ingenious mechanism that would help them sell homes to people who couldn’t afford them, which was basically the only sector left after back-to-back record breaking years of housing starts. To continue the growth, these guys wanted the “snow in July” I analogized in my last blog entry. It wasn’t natural and it wasn’t sustainable. And they very clearly knew it. Still, at the moment, it was excellent for business. At that moment.

After the perfunctory worrying about reality was over, here’s how the NAHB’s David Seiders summarized the situation at the May 2005 conference.

“Home Sales activity has easily been hitting records. Just basically, it’s been wow—up, up and away.”

“Wow” is an apt word for what happened. And it had only had a brief additional fling with the word “up;” thereafter, it created the most precipitous freefall in the modern history of homebuilding.
Home Starts
Ref: NAHB website, 11/19/2008

The mission of the NAHB is to “enhance the climate for housing and the building industry,” and to “promote policies that will keep housing a national priority.” It is now quite obvious that this single-minded, self-serving, short-termed, greed-induced agenda that makes the common economic and social good secondary considerations, borders on criminal behavior when you are the public voice of 235,000 members and 80% of the nation’s homebuilders. The NAHB has considerable clout, which can be used for good or ill. They chose poorly.

In early 2005, the little-understood magic mortgage potion appeared to be so good for NAHB’s homebuilders that it seemed worth offering that tempting elixir to even more homebuyers, even though the NAHB economists precisely understood its potential as a poison time-bomb. The thinking was nearly this sick: “Here, drink this. It will provide profits for us this year and happiness for you, at least for awhile.” Walking away, the purveyors of the drink-fest confide amongst themselves that they know it might also cause a massive outbreak of cholera in two years, but drop the conversation because it was dampening their euphoria. So they party-on knowing that “when,” not “if,” things go wrong, it will be the fault of those who were dumb enough to accept the free happy-potion being passed around in their gala of denial.

The fact is that the growth of the homebuilding sector had indeed reached its “natural limit,” probably somewhere in 2002 or 2003. More growth required defying natural seasons and cycles by denying common sense and basic math. Economist Adam Smith didn’t contemplate conscious, rationalized idiocy on such a large scale; his “invisible hand” was no match for such a massive, wanton snow job.

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